Company Car Tax Relief
Originally sent: November 25, 2009Do you have clients with a fleet of company cars? If so, would it be helpful if you could show them how to claim full tax relief on the capital cost of those cars much earlier than they are probably currently claiming it?
Just as a quick reminder, the rule for “medium emission” cars is that the purchase price is added to the plant and machinery pool for calculating capital allowances. A 20% writing down allowance is then applied on a reducing balance basis. This means they get 20% in the first year, 16% in the second year, 12.8% in the third year and so on. By year ten they will still not have obtained any tax relief on over 10% of the cost. Even after 20 years they will still not have been given all the tax relief. For “high emission” cars the position is even worse, as the writing down allowance is only 10%.
When the car is sold there is no “balancing allowance”. The tax allowance continues to be spread indefinitely. In the meantime the client has purchased another car, and also gets only a reduced allowance on this as well. Over a number of years, with several replacements having taken place, the gap between the amount spent and the amount the company can claim widens considerably. So any ideas you can give to narrow this gap again should be very welcome.
Firstly, although they should already be aware of this, remind your clients that if they purchase cars with emissions below 110 g/km they can claim a 100% first year deduction. Not only will they benefit from the cash flow but they can also feel justly proud that by buying “greener” cars they are “doing their bit” for the environment and to reduce global warming.
Assuming they are unable or unwilling to do this, at least until better low-emission cars are produced, there is another idea they have probably never considered and which could have a very positive impact on their cash flow.
The idea is that the client forms a service company, whose only function is to own and maintain the company car fleet. It charges the trading company for the use of the cars. When the company is ready to replace the cars, for example at the end of 3 years, a new company is formed to purchase the new cars, and the old company sells the old cars and ceases trading. If a company ceases trading, the tax rules allow it to apply a balancing charge, which means all the remaining tax allowances can be used. So now the company has obtained 100% relief over 3 years, instead of less than 50% which would otherwise have been the case. And when the cars in the new company need to be replaced? Well then that company ceases trading, and the first company picks up the baton again.
There will, of course, be some costs in running this system. There are the costs of filing returns for each company. Possibly increased accountancy fees – although this should be minimal given the simplicity of the transactions. And there may be increased tax due to the spreading of the small company tax threshold. This is something their accountant can explore for them. But at least in the meantime you have shown some additional creativity.
Another benefit of the system, which could be quite significant, is that the client will have removed from the company balance sheet “tangible moveable assets”, and this could lower the tax cost of transferring company shares into a SIPP. Those of you who have attended one of my days on “Extracting Cash from a Pension” will be well aware of the significance of this.
Finally, if a client is prepared to swap their company car for a company motorbike, the latter benefits from a 100% deduction in year one. Anyone for an MV Agusta?
For clients with a number of company cars one of these ideas could make a big difference to their cash flow. They may then be prepared to look at some of the financial planning ideas you wish to present which would take up some of that accelerated cash benefit.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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